Five “Must have Safety Nets” In Any Private Money Lending Transaction

There are 5 key “Safety Nets” you will want to insure you have in place before completing any transactions as a private money lender to real estate investors like myself. These “safety nets” will insure you are making a sound, solid investment with minimal risk and high returns: 1. Loan to Value Under 75% - This is pretty simple yet it is probably the most important aspect of determining whether or not you should lend on a particular transaction. As a general rule of thumb, you shouldn’t lend more than 75% of the market value of the home after it has been repaired. The term is referred to as “Loan-To-Value” The easiest way to determine LTV (Loan-to-Value) is to work the following formula: 1. Determine the After Repair Value (ARV) 2. Determine total loan amount (purchase price + repairs) 3. Divide your loan amount by the After Repair Value (ARV) Example: $74,000 = purchase price $12,000 = repairs $86,000 = total loan amount $125,000 = After repair value (ARV) $86,000/$125,000 = 69% LTV (loan-to-value) This is probably a pretty safe loan for you to make, but again, these are ballpark parameters you can use to assess risk. There are times you may want to cap your LTV lower than 75% and there are times you may be willing to go slightly higher as well. The good part is that it is you that sets these rules, not the real estate investor. Generally, the lower the LTV the lower the risk, the higher the LTV, the higher the risk. You’re also going to want to take a look at the track record of the investor well before you make any decisions. 2. Appraisal – In order to determine your ARV, or after repair value, you are probably going to want to get a full blown, legitimate appraisal. You may be able to determine a very tight range of the after-repair-value based upon your own research and how well you know the market, but it makes sense to spend a few hundred dollars to hire a professional to support your opinion. 3. Landlord Insurance Policy – Clearly I, as the real estate investor, have to have this in place but it will also protect you in case anything happens to the home. You will always want to make sure the policy covers “vacant property” and will always want to require the real estate investor to have this in place before closing takes place. 4. Estimate of Repairs – Until there is a relationship in place, you will probably want to have a professional estimate done of the repairs so you know the real estate investor has done an accurate cost assessment. The real estate investor may be able to get the work done more cheaply than your estimate depending on their experience and connections, but again, it makes sense to have this done so you can make sure there are no huge discrepancies. The best thing to do here is to find a home inspector that also has construction experience and have them prepare a report for you. 5. Title Insurance – This is a type of insurance you will be issued at closing and it is specifically designed to protect you against any potential title issues. Although it is incredibly rare, occasionally a problem with title to a property can pop up after closing and your “Lender’s Title Policy” will insure your money is protected in case of an issue. You don’t have to have a lender’s title policy, but it is a prudent measure to get one 100% of the time.